IRAs vs. HSAs: The Better Strategy
An Investment Retirement Account and Health Savings Account are both established at financial institutions, but they have their differences.
Here’s a helpful guide to educate you about the pros and cons of each account type:
Investment Retirement Account (IRA)
An account that aims to help consumers set aside a considerable amount for retirement using a tax-advantaged scheme.
It can otherwise be called an investing tool as it provides a wide range of investing possibilities: real estate, tax liens, precious metals, and private placements.
- A range of possible investment plans to choose from include traditional or Roth for individual taxpayers and SEP, or SIMPLE for business owners. Regardless of thetype you choose, the tax benefits allow your savings to grow exponentially compared to any taxable account.
- There’s no age limit for making contributions to the IRA.
- The professional asset management factor ensures that you’re not overlooking any potential risks on investment.
- You can withdraw penalty-free from an IRA for certain expenses such as medical, higher education, and home purchases.
- The annual contribution has its limitations. You or your partner must have earned the income to contribute to an IRA; income from investments or child support don’t qualify.
- Surcharges are applicable in the form of a tax bill and penalty if you withdraw any amount before the age of 59 and a half.
Health Savings Account (HSA)
This is similar to a personal saving account. The only difference is that you can summon an HSA for healthcare expenses only. It’s necessary to be enrolled in the High Deductible Health Plan (HDHP) to qualify for such an account.
- A wide range of mental, medical, and dental health service expenses qualify as eligible expenses.
- In an HSA, the contributions can come in from multiple sources. Additionally, the earnings and withdrawals are both tax-free.
- Most HSAs issue debit cards so you can pay for eligible expenses directly. If you opted for an alternative form of payment, the institution could also reimburse the amount.
- An HSA is portable. It remains valid despite changing insurance plans, employers, or even after retirement. The account rolls over annually, so the amount remains accessible for all future medical expenses.
- A few HSAs, varied by institutions, charge a transaction fee or maintenance fee, which is undoubtedly higher than the account’s interest rate.
- You’re required to maintain medical records that certify that you used the withdrawn amount for qualified health expenses in case you’re audited.
- If the withdrawal is made for non-qualified health expenses, you’ll be charged with additional taxes and a penalty. However, the penalty isn’t applicable for consumers over the age of 65.
- The pressure of saving is real and often compels individuals not to seek medical help to avoid spending money from their HSA accounts.
There are substantial tax benefits, flexibility, and safeguarding provisions of setting up this type of IRA; read more about how you can open a self-directed IRA account here.